OM handout Chapter one

CHAPTER ONE
CHAPTER ONE - NATURE OF OPERATIONS MANAGEMENT
1.1 Introduction
1.2 Historical Development of Operation Management
1.3 Manufacturing Operations and Service Operations
1.3.1 Manufacturing Operations
1.3.2 Service Operations
1.4 Operations Decision Making
1.5 Productivity Measurement

1. Introduction
Operations management designs, operates, and improves productive systems—systems for getting
work done. The food you eat, the movies you watch, the stores in which you shop, and the books you
read are provided to you by the people in operations. Operations managers are found in banks,
hospitals, factories, and government. They design systems, ensure quality, produce products, and
deliver services. They work with customers and suppliers, the latest technology, and global partners.
They solve problems, reengineer processes, innovate, and integrate. Operations are more than planning
and controlling; it’s doing. Whether it’s superior quality, speed-to-market, customization, or low cost,
excellence in operations is critical to a firm’s success.

What is Operations Management?

Different definitions are given for OM with little or no variations to the concepts they are addressing.
Some of the definitions are discussed below:
There is no one single definition given to the term operations and production management. The
following are few of the definitions given by different writers.
 Operation management deals with the production of goods and services that people buy and
use every day. It is a function that enables organization to achieve their goals through
efficient acquisitions and utilization of resources.
 OM refers to the interaction and control of the process that transform input into finished
goods and services.
 Operations Management is the activity of managing the resources, which produce and
deliver goods and services (Slack et al., 2010).
 Operations management is the design, operation and improvements of the production
system that creates the firms primary products or services. i.e., it is all about the
management of the production system where by the inputs are translated in to the final
output. This definition indicates that OM is a functional field of business with clear line of
responsibility.
In short, one can generalize that operations management is the management of system or processes
that create goods and/or provide services

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Need/ Importance/Why we study production/operations management?

We study production/operations management for the following basic reasons:
i. Operations management provides users to be competitive in the environment through doing
activities efficiently and effectively.
ii. Operation lies at the heart of business activities. The concepts and tools of OM are widely used
in managing other functions of a business. Running a business requires three basic activities.
These are:
a. Finance – deals with getting capital and equipment to deal with the business
b. Operations – deals with the use of human and material resources to create the products
that either make an organization healthy and competitive or cause it to fail.
c. Marketing – deals with selling and distributing the product.
iii. A business education is incomplete without an understanding of modern approaches to
managing operations. Every organization produces some product or service, so students must
be exposed to modern approaches for doing this effectively.
iv. OM presents interesting career opportunities. Thu to understand what operations managers do,
and develop the skills necessary to become such a manager students has to know OM.
v. Operation management helps to manage operating costs. Operation is a costly part of an
organization. A large percentage of the revenue of most firms is spent in the OM function.
Indeed, OM provides a major opportunity for an organization to improve its profitability and
enhance its service to society.
vi. OM provides a systematic way of looking at organizational processes.

2. Historical Evolution of Production/operations management

Operations management has existed for as long as people produced goods and services. Although the
origins of operations can be traced to early civilizations, ere we will focus the historical development
of operations management in the last 200 years. In the following discussion, the history of OM is
organized according to major contributions or theorists rather than in strict chronological terms. On
this basis, there are seven major areas of contribution to OM field. The developments of the following
concepts have their own contribution to OM field.
1. Division/specialization of Labor – it is based on a very simple concept – specialization of
labor to a single task can result in greater productivity and efficiency than the assignment of
many tasks to a single worker. The first economist to discuss the division of labor was Adam
Smith, author of the classic “Wealth of Nations” (1776). Smith noted that specialization of
labor increases output because of three factors:
i. Increased dexterity on the part of workers.
ii. Avoidance of lost time due to changing jobs, and
iii. The addition of specialized tools and machines.
Later, in 1832, Charles Babbage expanded on these ideas in his study of pin manufacturing. He noted
that specialization not only increases productivity but also makes it possible for only the specific skills
required.

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2. Standardization of parts – parts are standardized so that they can be interchanged.

Standardization was practiced in early Venice, where rudders on warship were made to be
interchangeable. This provided as musket production. Prior to this time, musket parts and even
ammunitions were tailored to each individual musket. When Henry Ford introduced the
moving automobile assembly line in 1913, his concept required standardized parts as well as
specialization of labor.
3. Industrial revolution – it was in essence the substitution of machine power for human power.
Great impetus was given to this revolution in 1764 by Games Watt’s stem engine, which was a
major source of mobile machine power for agriculture and factories. The industrial revolution
was further accelerated in the late 1800s with the development of the gasoline engine and
electricity. Early in this century, mass production concepts were developed when heavy
demands for production were placed on American industry. The age of mass marketing has
continued this pressure for automation and high volume production. Before the industrial
revolution, an item such as a blanket was made by one person, typically at home. The worker
would:
 Shear wool from sheep
 Twist the wool into yarn
 Dye the yarn
 Weave the blanket manually on a home looms, and then
 Sell the finished product to merchants.
4. Scientific study of Work – it is based on the notion that the scientific method can be used to
study work as well as physical and natural systems. This idea was brought by F.W. Taylor in
his book, Principles of Scientific Management, published in 1915. Believing that a scientific
approach to management could improve labor efficiency, he proposed the following
approaches:
i. Develop standardized procedures for the workers.
ii. Scientifically select, train and develop workers instead of letting them train themselves.
iii. Establish a sprit of cooperation between management and workers so that high
productivity at good pay is fostered.
iv. To divide the work between management and labor so that each group does the work
for which it is suited.
This idea was later refined by husband and wife Frank and Lillian Gilbreth (1911) when
developed motion economy studies. Henry Gantt (1914) was also instituted a charting system
for scheduling production.
5. Human Relations – the human relations movement highlighted the central importance of
motivation and the human element in work design. Elton Mayo and others developed this line
of thought in the late 1930s at Western Electric, where the now famous Hawthorne Studies was
conducted. These studies indicated that worker motivation – along with the physical and
technical work environment – is a crucial element in improving productivity. This led to a
modernization of the scientific management schools which had emphasized the more technical
aspects of work design. The human relations school of thinking has also led to job enrichment

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recognized as the method with a great deal of potential for “humanizing the work place” as
well as improving productivity.
6. Decision Models – decisions models can be used to present a productive system in
mathematical terms. A decision model is expressed in terms of performance measures,
constraints, and decision variables. These models can then help guide management decision
making. One of the first uses of this approach occurred in 1915, when E.W. Harris developed
an Economic Order Quantity formula for inventory management. In 1931 Shewhart
quantitative decision models for use in Statistical Quality control work. In 1947, George B.
Dantzig developed the Simplex method of Linear Programming, which made possible the
solution of a whole class of mathematical models. In the 1950s, the development of computer
simulation models contributed much to the study and analysis of operations.
7. Computers – the use of computers has dramatically changed the field of OM since computers
were introduced into business in the 1950s. Most manufacturing operations now employ
computes for Inventory management, Production scheduling, Quality control, and computer
Aided manufacturing and costing systems. In addition, computers are used extensively in
office automation, and they are used virtually in all types of service operations. Today the
effective use of computers is an essential part of the OM field. In the same sense, robots are
now doing much of the monotonous, dirty, and possibly dangerous work that can be done by
machines. In factories, they perform assembly, painting, welding and other respective tasks.

3. The Operations Function

Figure: Operations as a technical core

Activities in operations management (OM) include organizing work, selecting processes, arranging
layouts, locating facilities, designing jobs, measuring performance, controlling quality, scheduling

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work, managing inventory, and planning production. Operations managers deal with people,
technology, and deadlines. These managers need good technical, conceptual, and behavioral skills.
Their activities are closely intertwined with other functional areas of a firm

The four primary functional areas of a firm are marketing, finance, operations, and human resources.
As shown in Figure, for most firms, operations is the technical core or “hub” of the organization,
interacting with the other functional areas and suppliers to produce goods and provide services for
customers. For example, to obtain monetary resources for production, operations provides finance and
accounting with production and inventory data, capital budgeting requests, and capacity expansion and
technology plans. Finance pays workers and suppliers, performs cost analyses, approves capital
investments, and communicates requirements of shareholders and financial markets. Marketing
provides operations with sales forecasts, customer orders, customer feedback, and information on
promotions and product development. Operations, in turn, provide marketing with information on
product or service availability, lead-time estimates, order status, and delivery schedules. For personnel
needs, operations rely on human resources to recruit, train, evaluate, and compensate workers and to
assist with legal issues, job design, and union activities. Outside the organization operations interacts
with suppliers to order materials or services, communicate production and delivery requirements,
certify quality, negotiate contracts, and finalize design specifications.
`
As a field of study, operations bring together many disciplines and provide an integrated view of
business organizations. Operations managers are in demand in business, industry, and government.

4. Operation function and its environment/Operations System

Organizations are established to pursue goals that are achieved more efficiently by the concerned
efforts of a group of people than individuals working alone. To achieve their goals business
organizations are devoted by producing of goods or services. A typical business organization has three
basic functions: operation, finance and marketing. These three functions, and other supporting
functions (like personnel, engineering, purchasing), perform different but related activities necessary
for the operation of the organization. The functions must interact to achieve the goals and objectives of
the organization and each makes an important contribution. Often the success of an organization
depends not only on how well each are performs but also on how the areas interface with each other.

An operation is often defined as a transformation process. As shown in Figure 1.1, inputs (such as
material, machines, labor, management, and capital) are transformed into outputs (goods and services).
Requirements and feedback from customers are used to adjust factors in the transformation process,
which may in turn alter inputs. In operations management, we try to ensure that the transformation
process is performed efficiently and that the output is of greater value than the sum of the inputs. Thus,
the role of operations is to create value. The transformation process itself can be viewed as a series of
activities along a value chain extending from supplier to customer.

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Operations - the operations function consists of all activities directly related to producing goods or
providing service. It is the core of most business organizations that exists not only in manufacturing
and assembly operations, which are goods-oriented, but also in areas such as health care,
transportation, food handling, and retailing, which are primarily service-oriented. The operation
function mainly involves the conversion of inputs into outputs as it is indicated in the figure below:

Inputs are used to obtain finished goods/services by using transformation processes. To ensure that the
desired outputs are obtained, measurements are taken at various points in the transformation process
and then compared with the previously established standards to determine whether corrective action is
need (control). The essence of operations functions is to add value during the transformation process.
Value added is the term used to describe the difference between the cost of input and value/price of
output during transformation process.

The input–transformation–output process is characteristic of a wide variety of operating systems. In an

automobile factory, sheet steel is formed into different shapes, painted and finished, and then
assembled with thousands of component parts to produce a working automobile. In an aluminum
factory, various grades of bauxite are mixed, heated, and cast into ingots of different sizes. In a
hospital, patients are helped to become healthier individuals through special care, meals, medication,
lab work, and surgical procedures. Obviously, “operations” can take many different forms. The
transformation process can be

physical, as in manufacturing operations;

locational, as in transportation or warehouse operations;
exchange, as in retail operations;
physiological, as in health care;
psychological, as in entertainment; or
informational, as in communication.

5. Manufacturing operation versus service operations

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Manufacturing implies production of a tangible output, such as chair, table, whiteboard, pen or
anything else that we can see or touch. A service, on the other hand, generally implies an act such as
showing a theater. The majority of service jobs fall into these categories: government, wholesale/retail,
financial service, health care, personal services, business services, telecommunication and education.
Manufacturing and services are often similar in terms of ‘what is done’ but different in terms of ‘how
it is done’. For example, both involve design and operating decisions. Manufacturers must decide what
size factory is needed, and service organizations must decide what size building is needed. Both must
make location decisions, schedule and control operations, and allocate scarce resources. Most of the
difference between manufacturing and service organizations result because manufacturing is product
oriented and service is act oriented. The difference involves the following:
a. Customer contact: by its nature, service involves a much higher degree of customer contact
than manufacturing does. The performance of a service typically occurs at the point of
consumption; that is, the two often occur simultaneously. On the other hand, manufacturing
often occurs in an isolated environment, away from the customer. This permits a fair degree of
latitude in selecting work methods, assigning jobs, scheduling work, and exercising control
over operations. Service operations, because of their contact with customers, can be much
more limited in their range of options in these areas. Moreover, customers are sometimes a part
of the system such as in the case of self service operations, so tight control is not possible.
Then, too, product oriented operations can build up inventories of finished goods which
enables them to absorb some of the shocks caused by varying demand. However, since service
operations cannot build up inventories of time, service capacity is much more sensitive to
demand variability.
b. Uniformity of input: service operations are subject to more variability of inputs than typically
manufacturing operations are. In manufacturing there is often the ability to carefully control
the amount of variability of inputs and thus achieve low variability of inputs and thus achieve
low variability in outputs. Consequently, job requirements for manufacturing are generally
more uniform than for services.
c. Labor content of the jobs - because of the on site consumption of services and the high degree
of variation of inputs, services require a higher labor content, where as manufacturing can be
more capital intensive (i.e., mechanized) although there are exceptions.
d. Uniformity of input – because of high mechanization generates products with low variability,
manufacturing tends to be smooth and efficient; service activities sometimes appear to be slow
and awkward, and output is more variable.
e. Measurement of productivity – it is more straight forward in manufacturing due to the high
degree of uniformity of most manufactured items. In service operations, variations in demand
intensity and requirements from job to job make productivity measurement considerably more
difficult. For example, the work load of two instructors’ might be compared. One may have
had different types of courses in a given semester while the other only offer single course.
Thus, their productivity would appear to differ unless a very careful analysis was made.
f. Quality assurance – is more challenging in service when production and consumption occur at
the same time. Moreover, the higher variability of input creates additional opportunity for the

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quality of output to suffer unless quality assurance is actively managed. Quality at the point of
creation is typically more important for services than for manufacturing, where errors can be
corrected before the customer receives the output.

Summary of the difference between manufacturing and service operations

Characteristic Manufacturing Service
Out put Tangible Intangible
Contact with customer Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Storage Output can be inventoried Not
Delivery time Long lead times Short lead time
Quality Objectively determined Subjectively determined

In reality most firms are not selling purely services or goods rather manufacturers provide many
services as part of their product and many services often manufacture the physical product that they
deliver to their customers or consumer goods is creating the services. In essence goods are considered
as vehicles for services. To put in another way:
 In services outputs cannot be inventoried while for goods products can be invigorated
 There is extensive customer contact for service white for goods production customer contact is
little
 The lead-time is short for services (delivered immediately on spot e.g. doctor) while for goods
it is long.
 Service quality determined with difficulty (customer service and customer satisfaction are
difficult to measure.) while product quality can easily be determined.

6. Operations Decision making and operations strategies

Operations managers manage all the activities of the production system, which converts inputs into the
organization’s products and services. This definition states in very general terms what OM does, but
how operation managers manage is more important to an understanding of OM. To do so knowing
decisions to be made by operations managers is necessary. Operations managers’ manage by making
decisions about all activities of production systems. These decisions can be broadly categorized into
three:
1. Strategic decision – are decisions related to products, processes and facilities. They are
concerned with operations strategies and long range plan for a company. These decisions are so
important that typically people form production, personnel, engineering, marketing an finance get
together to study the business opportunities carefully and arrive at a decision that puts the company
in the best position of achieving its long-term goals. Examples of strategic decisions include:

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i. Product and production process: deciding whether to launch a new product development
project; and deciding on the design for a production process for a new product.
ii. Production technology: selecting and managing production technology
iii. Allocating resource to strategic alternatives: deciding how to allocate scarce raw materials,
utilities, production capacity, and personnel among new and existing business opportunities.
iv. Long range capacity planning and facility location : deciding on how much long range
production capacity and deciding what new factories are needed and where to locate them.
v. Facility layout: deciding the arrangements of facilities in producing company’s goods and/or
services.

2. Operating decisions: concerned with decisions about planning production to meet demand.
These decisions are necessary if the ongoing production of goods and services is to satisfy the
demand of the market and provide profits for the company. The principal responsibility of
operations is to take the orders form production and services form customers, which the marketing
function has generated, and deliver products and services in such a way that there are satisfied
customers at reasonable costs. In carrying out this responsibility, numerous decisions are made
such as:
i. Production planning systems: deciding on the companies aggregate production planning and
master production schedule
ii. Independent demand inventory system: deciding how much finished goods inventory to carry
for each product
iii. Resource/materials requirement planning system: planning materials and capacity requirements
iv. Shop-floor planning and control: short range decisions about what to produce and when to
produce at each work center.
v. Planning and scheduling service operations: decisions about planning and controlling
production of service
vi. Materials management and purchasing: managing all facets of the materials system.

3. Control Decisions – are concerned with decisions about planning and controlling operations.
These decisions concern the day to day activities of workers, quality of products and services,
production and overhead costs, and maintenance of machines. In this regard operations managers
are engaged in planning, analyzing, and controlling activities so that poor worker performance,
inferior product quality, and excessive machine breakdowns do not interfere with the profitable
operation of the production system. Major decision areas include:
i. Productivity of employees: planning for the effective and efficient use of human resources in
operations
ii. Total quality management: planning the system for the quality of products and services
iii. Quality control: application of statistical quality control tools to decide what quality control
acceptance criteria should be for products.

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iv. Maintenance management and reliability: planning or maintaining the machines and facilities
of production. Essentially, it focuses on how often to perform preventive maintenance on key
pieces of production machinery.
Quantitative Approaches: Quantitative approaches to problem solving often embody an attempt to
obtain mathematically optimum solutions to managerial problems. The functions are commonly used
quantitative approaches like, linear programming, Queuing techniques, Inventory models, Forecasting
techniques, Statistical models.

Operation decision become more complex when: it involves many variables, the variable are highly
interdependent or related, and the data describing the variables are incomplete or uncertain. The
necessity of working with incomplete and uncertain data has always been a problem for decision
maker. In the following section of this unit you will learn how to apply the quantitative tools in solving
operations related problems. Since it is difficult to illustrate the entire models only one model, which
can be used under the three situations of decision-making are discussed.

Decision Making Under Certainty: Under complete certainty conditions, all relevant information
about the decision variables and outcomes is known or assumed to be known. Following are some of
the methods used: Algebra: This basic mathematical logic is very useful for both certainty and
uncertainty analysis. With valid assumptions, algebra provides deterministic solutions such as break-
even analysis and benefit cost analysis. Calculus: The branch of mathematics provides a useful tool for
determining optimal value where functions such as inventory costs, are to be maximized or minimized.
Mathematical programming: Programming techniques have found extensive applications in making a
product mix decisions; minimizing transportation costs, planning and scheduling production and other
areas.

Decision Making Under Risk: Example. ABC manufacturing firms wants to meet the excess demand
to its products. The firm’s management is concerning three alternative courses of action.
A. Arrange for subcontracting
B. Begin overtime production
C. Construct new facilities
The correct choice depends largely on future demand, which may be low, medium or high.
Management ranks the respective probabilities as 10%, 50% and 40% to low, medium and high
product demand in the future respectively. A cost analysis reveals the effect on profit of each
alternative under a given state. This is given in the payoff table below.
Pay off table
Alternatives Profit if Demand is (Birr)
Low (0.1) Medium (0.5) High (0.4)
Arrange for sub contract (A1) 10,000 50,000 50,000
Over time (A2) -20,000 60,000 100,000
New facilities (A3) -150,000 20,000 200,000

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Required: Which alternative is the viable choice?

We can use expected monetary value approach and decision tree to answer this question.
1. Expected Monetary Value (EMV) – Determine the expected payoff of each alternative and
choose the alternative that has the best expected payoff.

EMV (A1) =10,000X0.1+0.5X 50,000+0.4X50, 000

=1000+25,000+20,000
=46,000

EMV (A2) = -20,000X0.1+60,000X0.5+100,000X0.4

= -2,000+30,000+40,000
= Br. 68,000
EMV (A3) = 150,000X0.1+20,000X0.5+200,000X0.4
= -15,000+10,000+80,000
= Br.75, 000 (highest expected value)
Decision: The best alternative is to construct new facilities because it has the highest expected value.

Decision Making Under Uncertainty: At the opposite extreme is complete uncertainty, no

information is available on how likely the various states of nature are under these conditions, five
possible decision criteria are:
A. Minimax regret – determine the worst regret for each alternative , and choose the alternative
with “ best worst”
B. Maximax – determine the best possible payoff and choose the alternative with that payoff. It is
an optimistic approach)
C. Laplace – determine the average payoff, and choose the alternative with the best average.
D. Maximin- determine the worst possible pay off for each alternative, and then choose the
alternative that has the “ best worst”. It is the pessimistic approach
E. Principles of insufficient reason- it assumes that since we know absolutely nothing about the
probabilities of any state of nature, we should treat each with equal probability, calculate the
expected values accordingly, and choose the alternative whose expected value is highest

Example: Based on the above pay off table and assuming that there is not probability value of
occurrence of each outcome, determine which alternative would be chosen under each of these
strategies.
a. Maximin b. Maximax c. Laplace
Solution:
a) Maximin Criteria: The worst pay off for the alternatives are Br. 10,000 for subcontracting, Br. -
20,000 for overtime and Br. -150,000 for new facilities and 10,000 is the best out of the worst; hence,
the decision is to choose subcontracting as an alternative using the maximin criteria.

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b) Maximax Criteria: The best pay off for each alternative, that is, for Sub contracting is 50,000, over
time Br. 100,000, and New facilities is Br. 2000,000. The decision is to construct new facility which
is an alternative with the best payoff value i.e., Br. 200,000

C) Laplace Criteria: The average payoff of each alternative is;

A1 = 10,000+50,000+50,000/3 = 36,667
A2 = -20,000 + 60,000 + 100000 /3 = 46,667
A3 == -150,000 + 20,000 + 200000 / 3 = 23,333

Decision: use overtime to absorb the excess demand.

7. Productivity measurements
Productivity is a common measure of how well a country, industry or business unit is using its
resources (or factors of production). In its broadest sense, productivity is defined as:

Productivity =
To increase productivity, we want to make this ratio of output to inputs as large as practical.
Productivity is what we call a relative measure. In other words, to be meaningful, it needs to be
compared with something else. Comparison can be made with similar operations within its industry, or
it can measure productivity over time within the same operation.
One of the primary responsibilities of an operations manager is to achieve productive use of
organizations resources. i.e. productivity.
1. Productivity is an index that measures output (products and services) of an organization
relative to the inputs (labor, materials, energy, and other resources) used to produce them.
Productivity = Total outputs of the firm
Total inputs used by the firm

The goal of productivity management is to make the ratio as large as practical; that would indicate the
highest output return for given inputs. Here outputs represent desired results whereas inputs represent
the resources used to obtain those results. In all cases, outputs and inputs must be quantifiable
measures to obtain meaningful productivity ratio.

2. Productivity is a process whereby an organization effectively and efficiently converts its

resources into the products and services it offers for sale.
Effectiveness is obtaining desired results; it may reflect output quantities, perceived quality, or both.
Efficiency occurs when a certain output is obtained with a minimum of input. In order to assure that
productivity measures captures what the company is trying to do with respect to such vague issues as
customer satisfaction and quality, come firms redefine productivity as follows:
Productivity = effectiveness or value
to customer
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Note – Effectiveness is doing the right things, and efficiency is doing things right. In general
productivity is a common measure of how well a country, industry or business unit is using its
resources (or factors of production)
Productivity may be expressed as:
1. Single factor/partial productivity measure: indicates the ratio of outputs (goods and services
produced) to one/single resources (inputs)
Partial measure = output or output or
output or output

2. Multifactor productivity measure: indicates the ratio of output to a group of inputs (but not
all inputs)
Multifactor measure = Output or Labor or
output

3. Total factor productivity measure: indicates the ratio of all output to all inputs. It may be
used to describe the productivity of an entire organization or even a nation.
Productivity = Output or Goods and
services produced

Illustration:
A furniture manufacturing company has provided the following data. Compare
i. Partial productivities for Labor; and materials and supplies
ii. Multifactor productivities for labor, and material and supplies; and labor, capital and
other
iii. Total productivity of 2006 and 2007.
2006 2007
Output Sales revenue 22,000 35,000
Input Labor 10,000 15,000
Raw materials and supplies 8,000 12,500
Capital equipment depreciation 700 1,200
Other 2,200 4,800
Solution:
2006 2007
Partial productivities
Labor 2.20 2.33
Raw materials and supplies 2.75 2.80
Multifactor productivity
Labor and materials and supplies 1.22 1.27
Labor, capital equipment depreciation and others 1.71 1.67

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Total productivity 1.05 1.04

Exercise:
A small scale shoe factory has provided you the following data over the past tow fiscal budge years
2006 2007
Output Sales revenue 60,000 80,000
Input Labor 22,000 30,000
Raw materials 26,000 35,500
Supplies 2,000 3,000
Depreciation 6,000 9,000
Compare
i. Partial productivities for Labor; Raw materials; and Depreciation
ii. Multifactor productivities for labor, and supplies; and for Raw materials, supplies and
Depreciation.
iii. Total productivity of 2006 and 2007.

Factors affecting productivity

Productivity increases are largely dependent up on three productivity variables:

1. Labor – improvements in the contribution of labor productivity is the result of a healthier,
better educated, and better nourished labor force. Some increase may also be attributed to a
short workweek. Historically, one-six (i.e. about 17%) of the annual improvement in
productive is attributed to improvements in the quality of labor. Three major factors affect
labor productivity: the physical work environment, employee’s job performance and product
quality.
2. Capital – human beings are tool using animals. Capital investment provides those tools.
Capital contributes one-six (17%) of the annual increase in productivity. Inflation and taxes
increase the cost of capital, making the capital investment increasingly expensive, when the
capital invested per employee drops, we can expect a drop in productivity. Using labor rather
than capital may reduce unemployment in the short run, but it also makes economies less
productive and therefore lower wages in the long run. The trade-off between capital are
“squeezed out”: they are not pursued because the potential return on investment for a given risk
has been reduced. Thus, operations managers adjust their investment plans to changes in
capital cost.
3. Management – is a factor of production and an economic resource. It is responsible of
ensuring that labor and capital are effectively used to increase productivity. Management
accounts for about two-third (about66.67%) of the annual one percent increase in productivity.
It includes improvements made through the application of technology and the utilization of
knowledge. Operations managers build workforces and organizations that recognize the

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continuing need for education and knowledge. They ensure the technology, education, and
knowledge are used effectively.

How to make the productivity ratio large

It is insufficient to measure the ratio of output to input unless something is done to increase that ratio
over time. To do this, management and the organization as a whole have only five options to make the
ratio bigger:
1. Make the output larger for the same input
2. Make the input smaller for the same output
3. Increase the output while decreasing the input
4. Increase output greater than the input increase
5. Decrease the output less than the input decreases

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